Big Bank Foreclosure Delays Signal Big Trouble

JP Morgan Chase told CNBC on Wednesday that it will delay more than 56,000 foreclosure proceedings due to paperwork that was signed, "without the signer personally having reviewed those files."

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Foreclosed Home

That came on the heels of GMAC halting foreclosuresand evictions in 23 states for roughly the same reason. All this leads anybody with a heartbeat to figure that other large servicers will likely follow suit, as potential lawsuits abound.

So what will that mean to the larger foreclosure crisis and the already weakening housing recovery?

"I would suspect that most responsible lenders are going to be looking at their processes and making sure that they've done everything properly, so they're not subject to the same accusations and lawsuits."

So far the largest lender/servicer, Bank of America has not returned my request for information, but you can imagine the level of scrambling going on right now at all the major servicers, now that a big name like JP Morgan Chase has made its move. Whether or not the foreclosures are bad, and I suspect the majority of them are valid in their claims if not in their procedures, the potential for a much bigger mess is high.

"As of right now this is a policy and procedure issue until proven otherwise, but never underestimate mid-term electioneering," says mortgage consultant Mark Hanson. "If this does go to the next level (i.e. national foreclosure moratorium, fear that hundreds of thousands of foreclosures have been performed illegally, etc.), the unintended negative consequences on the mortgage market, MBS investors, banks' balance sheets and ultimately the housing market will be significant. "

We're already seeing threats of ratings agency downgrades on all the major servicers, not to mention the threat to housing's overall recovery. If the bulk of these cases are valid, then delaying them is only going to prolong the pain.

"Worst case is that the current foreclosure problems turn out to be industry-wide and trigger a landslide of legal challenges that lock up foreclosures resolutions for a year or more," says Guy Cecala, publisher of Inside Mortgage Finance.

That means all kinds of borrowers would sit in their homes free of charge, banks would be unable to get any return at all, and the housing market would still be facing the inevitable: "We may then see a [foreclosure] surge at some point in the future," notes Treasury's Maggiano.

We've talked an awful lot about artificial government stimulus skewing the housing recovery as it tries to help; that's nothing compared to the potential for this latest scandal to wreak havoc on housing yet again.